Moving forward with PSD2 XS2A: a forced marriage of convenience between banks and TPPs?

Plaatsingsdatum

10-07-2015

Berichtdatum

10 juli 2015

Artikel van Innopay, door Mounaim Cortet, Douwe Lycklama

With Fintech companies moving rapidly incumbent banks need to strategize fast to retain their market power through a resilient digital, API driven business strategy. In our previous blog we discussed how banking execs can benefit from and respond to PSD2 ‘Access to account’ (XS2A). Incumbent banks are confronted with two fundamental choices in this regard; 1) Positioning in the value chain, and 2) Breadth of transaction services portfolio. These two choices result in four strategic options that banks could pursue to react to PSD2 XS2A; Mitigate, Compete, Expand and Transform.

In this article we elaborate on the benefits and implications of collaboration between banks, innovative third party providers (TPPs)[1] and other types of Fintech companies. While the four individual XS2A strategies we defined are indispensable for banks there is also a collaborative standardization and interoperability dimension to PSD2 XS2A. This needs to be considered due to the two-sided nature of the payments market. Collaboration is essential to mitigate the risks surrounding XS2A, such as market fragmentation of innovative payment services for payers and payees, varied security standards, reduced trust and slow(er) market growth.

Innopay contributed to a recently published opinion paper in which the European Banking Association (EBA, not to be confused with the Authority) laid down its vision to avoid such market fragmentation. Key element in realizing its vision is the creation of the ‘Digital Customer Services Interface’ (DCSI), i.e. an API[2] layer on top of the existing SEPA and cards payment infrastructure to facilitate interoperability on a pan-European level between banks and TPPs. This is depicted in the figure below.

Question that rises is why would banks and TPPs should partner (apart from the regulatory push)? The simple answer is that they need each other to make attractive applications and services for payers and payees. This in turn will accelerate adoption of innovative services and market growth, contributing to top and bottom-line growth. Put differently, banks provide the trust, reach and scalability, while TPPs and other Fintech providers deliver seamless user experiences that add value and drive conversion.

In particular, in the EBA thinking the DCSI allows banks to offer online, real-time services for payment initiation, account information and digital identity in various contexts (i.e. B2B, B2C and C2C). For this purpose, interoperability with TPPs is key, as it will allow banks to offer their reach and Anti-Money Laundering (AML) and Know Your Customer (KYC) expertise to TPPs. It could also enable banks to benefit themselves from a TPP’s innovations by engaging in a strategic partnership. Put simply, the DCSI is a possible way forward to accelerate the digital economy whilst having the potential to enable banks to comply with PSD2 in a cost effective manner.

In summary, the development of PSD2 XS2A is yet another trigger for banking executives to get real about banking API business strategies. While at board level there are still many strategic questions in need of an answer (see blog 1), banking leaders are challenged on adequate and timely decision-making regarding the bank’s future strategic value chain position and product portfolio (see blog 2). Next to a banks individual strategy, collaboration with industry peers, TPPs and other Fintech challengers is key to avoid the all-important risk of market fragmentation that all two-sided markets face. The future of banking starts today!

Understanding the implications on future business models and partnership strategies for banks and TPPs in a continuously evolving digital economy is not an easy task. Contact us to discuss the opportunities, threats and roadmap for your organization.

[1] In the PSD2 these players are referred to as Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs).

[2] Application Programming Interface (API): technology concept that allows software applications to communicate without human intervention. An API specifies: mechanism to connect to the software, what data and functionality is available, and a set of rules (standardization) that other software applications have to follow to access data and functionality.